A recovery of sorts

As the wintry chill replaces the late autumn, and vaccination rate ticks upwards, is it too early to start thinking of a spring of economic recovery? Notwithstanding the possibility of yet another variant of the virus, a recovery of sorts is in the offing, according to three recent reports by the IMF, the World Bank, and the Asian Development Bank.

Before delving into these projections, however, a quick primer of the alphabet soup of the shape of the recovery would be useful. The most optimistic of all possible trajectories of a recovery out of any downturn is the V-shaped one.

In the case of the pandemic, the narrative underpinning a V-shaped recovery is that there is nothing fundamentally broken with the economy. And as the pandemic ends, activities will be roaring back, along with jobs and income.

A less rosy, but still optimistic story is the U-shaped recovery, which is similar to the V in terms of a rapid rebound, but the trough is lower and longer.

Then there is the W-shaped case, where an initial rapid recovery is likely to be followed by another sharp deterioration in case of further lockdowns.

The most pessimistic one is the L-shaped trajectory, whereby the economy does not actually recover to the pre-pandemic growth path into the medium term. In this case, the pandemic lays bare the existing problems in the economy or scars enough sectors in a way that growth remains slow even when the pandemic is over.

In addition to incredibly optimistic assessments of GDP growth despite the lockdowns in 2020, both the 2020-21 and 2021-22 budgets were predicated on a V-shaped recovery, with the economy expected to swiftly return to the 8 percent growth trajectory.

The Bangladesh Bureau of Statistics revised down GDP growth rates for 2019-20 and 2020-21 in August. Even that revision, however, did not consider the delta variant related lockdowns. That is, the V-shaped recovery is not tenable anymore.

Source: IMF World Economic Outlook (October 2021, October 2019); World Bank South Asia Economic Focus (Fall 2021); ADB Asian Development Outlook Update (September 2021); author’s calculation. All data are in financial years.

The three multilateral agencies have had the chance to incorporate the effects of the latest lockdowns in their numbers. Notwithstanding the delta variant, all three agencies expect the economic recovery to continue to gather pace, and an U-shaped recovery is projected (Chart 1).

With 6.8 percent growth expected in 2021-22, the ADB is the most bullish of the three institutions. Reflecting a baseline assumption of global recovery, they expect exports to reach pre-pandemic levels in the second half of FY2022, reflected in a manufacturing recovery.

Remittances are also expected to remain strong, firming up private consumption and the services sector. Investment is also expected to recover, as is the agriculture sector.

That is, a well-rounded, balanced recovery is projected by the prognosticators of Manila. The World Bank economists, in contrast, don't expect exports to recover as swiftly, and are less sanguine about remittances.

They expect the economy to grow by 6.4 percent in 2021-22 on the back of government consumption and investment, with the private sector recovering in 2022-23. The IMF assessment would appear to be somewhere in between.

So, a recovery of sorts is very much countenanced by everyone. However, the pandemic is expected to leave a legacy of scarring. For example, the growth rates recorded in the years before the pandemic do not appear to be likely any time soon.

In the five years to 2019, the economy grew by 7.4 percent a year. In contrast, the latest IMF projections show the economy growing by 7.3 percent in 2026.

Chart 2 shows that the economy might have been 7-8 percent bigger every year had the pandemic not hit.

Source: IMF World Economic Outlook (October 2021, October 2019); World Bank South Asia Economic Focus (Fall 2021); ADB Asian Development Outlook Update (September 2021); author’s calculation.

One way to think about this is that even if the recovery pans out as expected, the pandemic has caused the economy a year's worth of income. Another way is to look at the consequences of the economic slowdown for poverty reduction.

In October 2019, the World Bank projected that 47.2 percent of Bangladeshis would be in poverty - defined by daily income of less than $3.20 - in 2020-21, of which 11.7 percent were expected to be in extreme poverty, earning less than $1.90 a day.

The latest estimates for 2020-21 have 48.9 percent of people in poverty, and 12.5 percent in extreme poverty. That translates into 2.8 million more poor people, of which 1.3 million are in extreme poverty.

Poverty rates are expected to fall in 2021-22 as the recovery takes hold, to their 2018-19 levels. That is, even if the recoveries play out as expected, they will have cost the country three years in its fight against poverty.

Of course, the recovery is by no means certain. All three agencies stress that downside risks dominate, including further mutations of the virus. Exports and remittances cannot be taken for granted. Global supply chain problems mean inflation could flare up, affecting the poor disproportionately. And as in any developing country, the government's policy options remain limited.

A spring of recovery of sorts is foreseen, but perhaps nothing quite yet to celebrate.

Jyoti Rahman is an applied macroeconomist. His analyses are available at https://jrahman.substack.com/